SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NO. 0-18602
ATS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1595629
(state or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3905 ANNAPOLIS LANE, SUITE 105 55447
MINNEAPOLIS, MINNESOTA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 553-7736
Former name, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
The number of shares outstanding of each of the registrant's classes of
common stock as of August 1, 1997 was:
Common Stock $.01 par value 17,562,231 shares
ATS MEDICAL, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Statements of Financial Position - 3
June 30, 1997 (unaudited) and
December 31, 1996
Statements of Operations - 4
Three Months and Six Months Ended
June 30, 1997 and 1996 (unaudited)
Statements of Cash Flows - 5
Six Months Ended June 30, 1997 and
1996 (unaudited)
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 10
Market Risk
PART II. OTHER INFORMATION 11
Signatures 13
Item 1 Financial Statements
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF FINANCIAL POSITION
JUNE 30, DECEMBER 31,
1997 1996
ASSETS ------------ ------------
(Unaudited) (Note)
CURRENT ASSETS
Cash & cash equivalents $ 4,163,750 $ 2,320,010
Marketable securities 24,647,466 7,867,619
------------ ------------
28,811,216 10,187,629
Accounts receivable, less allowance of $230,000
in 1997 and $200,000 in 1996 4,030,820 3,139,559
Inventory 19,702,932 18,242,066
Prepaid expenses 278,761 468,249
------------ ------------
TOTAL CURRENT ASSETS 52,823,729 32,037,503
FURNITURE, MACHINERY & EQUIPMENT 2,068,564 2,014,439
Less accumulated depreciation 1,240,896 1,119,875
------------ ------------
827,668 894,564
OTHER ASSETS 429,803 388,233
------------ ------------
TOTAL ASSETS $ 54,081,200 $ 33,320,300
============ ============
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,247,491 $ 1,190,958
Accrued payroll and expenses 195,437 202,603
------------ ------------
TOTAL CURRENT LIABILITIES 1,442,928 1,393,561
LONG-TERM DEBT 0 0
SHAREHOLDERS' EQUITY
Common Stock, $.01 par value:
Authorized 40,000,000 shares; Issued and
outstanding 17,562,231 & 15,288,042 at
June 30, 1997 and Dec 31, 1996, respectively 175,622 152,880
Additional paid-in capital 71,777,566 52,313,315
Other 41,796 54,465
Retained earnings (deficit) (19,356,712) (20,593,921)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 52,638,272 31,926,739
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 54,081,200 $ 33,320,300
============ ============
Note: The balance sheet at December 31, 1996 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed financial statements.
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES
Net sales $ 3,695,230 $ 3,069,820 $ 7,139,880 $ 5,666,700
Less cost of goods sold 2,297,583 1,880,751 4,469,671 3,555,036
----------- ----------- ----------- -----------
GROSS PROFIT 1,397,647 1,189,069 2,670,209 2,111,664
OPERATING EXPENSES
Research, development and engineering 261,266 166,628 496,760 329,014
Selling, general and administrative 801,909 815,185 1,521,328 1,566,832
----------- ----------- ----------- -----------
TOTAL EXPENSES 1,063,175 981,813 2,018,088 1,895,846
Interest income 325,699 146,365 585,089 329,974
----------- ----------- ----------- -----------
NET INCOME $ 660,171 $ 353,621 $ 1,237,210 $ 545,792
=========== =========== =========== ===========
Net income per share:
Basic $ 0.04 $ 0.02 $ 0.07 $ 0.04
=========== =========== =========== ===========
Fully Diluted $ 0.04 $ 0.02 $ 0.07 $ 0.03
=========== =========== =========== ===========
Weighted average number of shares
outstanding during the period:
Basic 17,559,084 15,121,894 16,992,428 15,111,773
=========== =========== =========== ===========
Fully Diluted 18,139,842 16,661,302 17,610,370 16,707,101
=========== =========== =========== ===========
ATS MEDICAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1997 1996
------------ -----------
OPERATING ACTIVITIES
Net income $ 1,237,210 $ 545,792
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 122,151 113,384
Loss on disposal of equipment 1,242 0
Changes in operating assets and liabilities:
Accounts receivable (891,261) (159,904)
Prepaid expenses 189,488 298,182
Other assets (41,570) (6,485)
Inventory (1,460,866) (1,985,577)
Accounts payable and accrued expenses 49,367 (925,409)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES (794,239) (2,120,017)
INVESTING ACTIVITIES
Purchase of marketable securities (23,531,358) (3,739,207)
Sale of marketable securities 6,745,920 6,639,438
Purchases of property, plant and equipment (56,497) (99,441)
------------ -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (16,841,935) 2,800,790
FINANCING ACTIVITIES
Notes payable 0 0
Net proceeds from sale of common stock 19,486,993 1,089,387
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,486,993 1,089,387
Effect of exchange rate changes on cash (7,079) (2,590)
INCREASE IN CASH AND CASH EQUIVALENTS 1,843,740 1,767,570
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,320,010 2,213,632
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,163,750 $ 3,981,202
============ ===========
ATS MEDICAL, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1997
Note A - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month and six month periods ended June 30, 1997
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1997.
Note B - NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common
shares outstanding and dilutive common stock equivalents, if applicable. In
February 1997, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 128, "EARNINGS PER SHARE." This Statement replaces the
presentation of primary earnings per share (EPS) with basic EPS and also
requires dual presentation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for the fiscal year ended
December 31, 1997. For the quarter ended June 30, 1997, the basic net income per
share under Statement 128 is $.04 per share on 17,559,084 weighted average
shares outstanding for the period. For the six months ended June 30, 1997, the
basic net income per share under Statement 128 is $.07 per share on 16,992,428
weighted average shares outstanding for the period.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ATS Medical, Inc. (the "Company") is engaged in the manufacturing and marketing
of a pyrolytic carbon bileaflet mechanical heart valve. The Company sells the
ATS Open Pivot TM valve (the "ATS Valve" or the "Valve") in international
markets and has recently initiated a clinical study in the United States for the
purpose of obtaining regulatory approval.
RESULTS OF OPERATIONS
Net sales for the quarter ended June 30, 1997 increased 20% to $3,695,230
compared to $3,069,820 for the quarter ended June 30, 1996. Unit sales increased
21% in the second quarter 1997 compared to 1996. Sales growth can be attributed
to continued implant growth in Europe and other Asia Pacific countries as well
as strong purchases by the Company's Japanese distributor. The Shonin (Japanese
regulatory approval) for the ATS Medical, Inc. heart valve was received late in
the second quarter of 1996.
Net sales for six months ended June 30, 1997 totaled $7,139,880 compared to
$5,666,700 for six months ended June 30, 1996. Revenue increased about 26% and
unit sales increased about 27% for the six months ended June 30, 1997 as
compared to the six months ended June 30, 1996. Although revenues and unit sales
increased in each of the first two quarters of 1997 as compared to the
corresponding quarters in 1996, the rate of increase in the second quarter of
1997 was less than the ratio of increase in the first quarter of 1997. This is
due to two principal factors. First, as mentioned previously, sales in Japan
began in June of 1996, which increased the sales in the second quarter of 1996
and so reduced the rate of increase in 1997. Second, pricing pressures from
competitors and the strong dollar in 1997 negatively impacted revenue and unit
sales increases in 1997. While the Company invoices its customers in dollars,
the customers must use local currencies to purchase dollars to pay for Valves,
and in many cases it now takes much more local currency to buy dollars. The
quarter which ends September 30 is usually the weakest quarter each year, not
only for the Company but also for other implantable medical device companies, as
European surgical activity slows during vacation season.
Cost of sales for the second quarter of 1997 totaled $2,297,583 or 62% of sales
compared to $1,880,751 or 61% of sales for the second quarter of 1996. Cost of
sales for the six months ended June 30, 1997 totaled $4,469,671 or 63% of sales
compared to $3,555,036 or 63% of sales for the six months ended June 30, 1996.
The price of the carbon components contained in the Valves sold in the six
months ended June 30, 1997 increased 3% as compared to the cost of carbon
components contained in the Valves sold in the six months ended June 30, 1996.
Based upon the Company's internal sales projections, the price of the carbon
contained in Valves sold during the remainder of 1997 is expected to be 3%
higher than in 1996.
Gross profit totaled $1,397,647 for the quarter ended June 30, 1997 or 38% of
sales, compared to gross profit of $1,189,069 or 39% of sales for the quarter
ended June 30, 1996. Gross profit
totaled $2,670,209 or 37% of sales for the six months ended June 30, 1997
compared to $2,111,664 or 37% of sales for the six months ended June 30, 1996.
The Company achieved manufacturing efficiencies in the six months ended June 30,
1997 sufficient to offset a slight decline in the average selling prices and the
increase in the cost of carbon components compared to the six months ended June
30, 1996.
Research, development and engineering expenses totaled $261,266 for the quarter
ended June 30, 1997 versus $166,628 for the quarter ended June 30, 1996. For six
months ended June 30, 1997 research, development and engineering expenses
totaled $496,760 compared to $329,014 for six months ended June 30, 1996.
Approximately 47% and 39% of research and development expenses for the quarters
ended June 30, 1997 and 1996, respectively, were for testing and outside
consulting services related to the Valve. A large component of the year to year
increase is development work on an aortic valved graft ("AVG"). The AVG is a
standard ATS Medical, Inc. replacement aortic heart valve sutured at the end of
a dacron tube. This product extension is used in surgeries where the patient's
aorta is damaged or degenerated. Most other valve manufacturers provide a
similar product.
The Company began human implants in the United States under an Investigational
Device Exemption ("IDE") in January 1997. The Company sells the Valves to the
hospitals involved in the study and is eligible for reimbursement by Medicare
and most private pay insurance companies. The Company is responsible for
reimbursing the hospital for certain additional tests and procedures required by
the clinical protocol and accrues the estimated total cost of follow-up at the
time the sale is recorded as research and development expense.
Selling, general and administrative expenses totaled $801,909 for the quarter
ended June 30, 1997, a decrease from the $815,185 reported for the quarter ended
June 30, 1996. The Company held the Second Symposium on the ATS Valve in the
fourth quarter of 1996. Commitments and deposits were required throughout 1996
for this meeting so the Company accrued $150,000 in the quarter ended June 30,
1996 and $200,000 for the first six months of 1996. There is no symposium or
comparable expense expected in 1997. Salaries, wages and benefits increased
nearly $160,000 or approximately 12% during the first six months of 1997. The
Company had 50 employees at June 30, 1996 compared to 58 employees at June 30,
1997.
There was no interest expense incurred in the quarters or six month periods
ended June 30, 1997 and 1996.
Interest income totaled $325,699 for the quarter ended June 30, 1997 compared to
$146,365 for the quarter ended June 30, 1996. For the first half of 1997
interest income totaled $585,089 compared to $329,974 for the first six months
of 1996. The increase in interest income for the first half of 1997 was the
result of more cash on hand to invest than the first six months of 1996. Cash on
hand at June 30, 1997 is significantly greater than the amount on hand during
1996, due primarily to the sale of equity and exercise of warrants in the first
quarter of 1997. Interest income for the remainder of 1997 is expected to be
greater than the last two quarters of 1996.
Net income totaled $660,171 for the quarter ended June 30, 1997 versus net
income of $353,621 for the quarter ended June 30, 1996. Net income totaled
$1,237,210 for the six months ended June 30, 1997 compared to $545,792 for the
six months ended June 30, 1996. The $558,545 increase in gross profit in the
first half of 1997 as compared to the first half of 1996 was greater than the
$122,242 increase in operating expenses, which resulted in $652,121 operating
income for the six months ended June 30, 1997 and increased net income compared
to the first six months of 1996.
Earnings per share totaled $.04 for the quarter ended June 30, 1997 compared to
$.02 for the quarter ended June 30, 1996. Earnings per share for the first six
months of 1997 totaled $.07 compared to $.03 for the first six months of 1996.
The weighted average number of shares outstanding increased 5% for the six
months ended June 30, 1997 over 1996 primarily due to the issuance of shares in
the February, 1997 private sale of common stock .
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities increased by $18,623,587 from
$10,187,629 at December 31, 1996 to $28,811,216 at June 30, 1997. Inventory
purchases and accounts receivable growth caused the company to have negative
cashflow from operations. On February 10, 1997 the Company announced the sale of
1,568,940 shares of common stock to ITOCHU Corporation of Japan raising $14.75
million in new cash. The Company also collected $5,203,818 during the first
quarter of 1997 from the exercise of warrants.
During 1997 the Company is required to purchase $11.4 million of heart valve
components in accordance with the terms of its long term supply agreement with
CarboMedics, Inc. (the "Supply Agreement"). During the three contract years
after 1997 the Company is obligated to purchase an aggregate of approximately
$50 million of components. The minimum purchases under the Suppy Agreement are
not tied to sales of the Company's Valve and the Company does not expect sales
of the Valve to exceed the minimum purchase requirements under the Supply
Agreement until the Valve is approved for sale in the United States by the Food
and Drug Administration. Deliveries under the terms of the Supply Agreement are
expected to increase during the second half of 1997 which will cause cash, cash
equivalents and marketable securities to decline.
Accounts receivable increased from $3,139,559 at December 31, 1996 to $4,030,820
at June 30, 1997. Most of the Company's sales have been to customers in
international markets and while the Company attempts to set standard 60 day
terms for receivables, competitive pressures and geographical economic
situations have caused the Company to selectively extend the terms for payment.
Accounts payable increased from $1,190,958 at December 31, 1996 to $1,247,491 at
June 30, 1997. The majority of the increase in accounts payable is related to
the amount owing to CarboMedics, Inc. under the Supply Agreement.
Based upon the Company's current rate of sales, its expected obligations under
the Supply Agreement and its expected expenses, the Company anticipates that
existing cash, cash equivalents and short-term investments will be sufficient to
satisfy its capital requirements through 2000. Beyond 2000 the Company must
continue to substantially increase revenues to meet its capital requirements.
Should revenues not increase sufficiently, the Company may be required to raise
additional equity capital. There can be no assurance that equity would be
available to the Company at favorable terms, if at all.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their business, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. ATS Medical, Inc.
desires to take advantage of the safe harbor provisions with respect to any
forward-looking statements it may make in this filing, other filings with the
Securities and Exchange Commission and any public oral statements or written
releases. The words or phrases "will likely," "is expected," "will continue,"
"is anticipated," "estimate," "projected," "forecast," or similar expressions
are intended to identify forward-looking statements within the meaning of the
Act. Such statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected. The Company
cautions readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made.
In accordance with the Act, the Company identifies the following important
general factors which if altered from the current status could cause the
Company's actual results to differ from those described in any forward-looking
statements: the continued acceptance of the Company's mechanical heart Valve in
international markets, the acceptance by the U.S. FDA of the Company's
regulatory submissions, the continued performance of the Company's mechanical
heart valve without structural failure, the actions of the Company's competitors
including pricing changes and new product introductions, the continued
performance of the Company's independent distributors in selling the Valve, and
the actions of the Company's supplier of pyrolytic carbon components for the
Valve. This list is not exhaustive, and the Company may supplement this list in
any future filing or in connection with the making of any specific
forward-looking statement.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Shareholders of the Company was held on May 1,
1997 at which time (i) five nominees were elected to the Board of Directors for
one-year terms, (ii) the appointment of Ernst & Young LLP as the independent
auditors of the Company was approved and (iii) the amendments to the ATS
Medical, Inc. 1987 Stock Option and Stock Award Plan (the "Plan") increasing the
number of shares of the Company's Common Stock subject to the Plan from 2.4
million to 3.4 million shares and to satisfy the requirements of section 162(m)
of the Internal Revenue Code of 1986, as amended, were approved. Proxies for the
Company were solicited pursuant to Section 14(a) of the Securities Exchange Act
of 1934, as amended, and there was no solicitation in opposition to management's
solicitations. All nominees for directors as listed in the proxy statement were
elected. The voting results were as follows:
Broker
For Against Withheld Non-Votes
--- ------- -------- ---------
Election of Directors:
Manual A. Villafana 14,594,654 0 312,475 0
Richard W. Kramp 14,595,304 0 311,825 0
Charles F. Cuddihy, Jr. 14,590,429 0 316,700 0
James F. Lyons 14,593,554 0 313,575 0
A. Jay Graf 14,594,754 0 312,375 0
Approval of Independent
Auditors 14,877,129 12,525 17,475 0
Amendment to the Plan 7,809,609 1,322,211 56,077 5,719,232
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
10.1 ATS Medical, Inc. 1987 Stock Option and Stock Award Plan, as
amended to date
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 1997 ATS Medical, Inc.
By: /s/ John H. Jungbauer
-------------------------------------
John H. Jungbauer, Vice President/CFO
(Principal Financial Officer and
Authorized Signatory)
EXHIBIT INDEX
Number Description
------ -----------
10.1 ATS Medical, Inc. 1987 Stock Option and Stock Award Plan, as
amended to date
27.1 Financial Data Schedule